Tiny Behavioral Shifts Can Lead to Big Changes in Your Finances
Why do we make illogical choices about our money that aren't in our best interest financially? Here's how psychology plays into these decisions, and how small changes you can make today can lead to major, overall improvements in your financial health.
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Put six months of emergency savings aside. Save for your retirement. Have a budget. Save more than you spend. You're likely well aware of the basic tenets of sound financial habits and what you should be doing with your money to take care of past, present, and future you. But actually, doing those things is an entirely different story.
So why do we make illogical choices about our money that aren't in our best interests? The reason can be partly chalked up to behavioral economics, the merger of psychology and economics. We'll go over a few of these cognitive distortions and how to build solid habits to improve our overall money situation:
Putting things off until tomorrow
We plan to start our diets tomorrow and plan to behave better in the future, says Scott Rick, a behavioral scientist and associate professor of marketing at the University of Michigan's Ross School of Business, and author of Tightwads and Spendthrift: Navigating the Money Minefield in Real Relationships.
"Tomorrow always becomes today, and we start that process over again," says Rick. "But we always have less willpower than we plan to have." In turn, we end up putting off those changes that can help us–getting our head around how credit scores work, setting up an emergency savings account, or speaking to a financial advisor on our retirement goals, to name a few.
Going for short-term gain instead of long-term reward
A handful of studies show that the brain is wired to choose immediate gratification over a long-term reward. Why's that? In part, it's because when it comes to decisions that have to do with immediate rewards, the brain is more heavily influenced by neural systems linked with emotion.
"We have a lot of lofty plans, but there are just immediate temptations that loom larger than future benefits of restraining ourselves," says Rick. "Things that happen at any later point than now, we tend to care less about."
The perception that you don't know enough to get started
With the litany of personal finance books, publications, and talking heads out there, it's easy to feel like you don't know enough. Plus, you might feel overwhelmed and not sure where to get started with making moves to better your finances.
"Someone might not feel they have the financial literacy required to do something meaningful with their money," says Rick. "Many people would score well on financial literacy quizzes, but if you ask them, 'How many questions do you think you got right?' They underestimate how well they did. Some people feel this stuff is daunting, and they don't realize they are actually capable of navigating it."
What can you do about it?
Now that we've gone over some of the cognitive distortions and biases about your finances, here are some tips on making small moves. It's these minor shifts you can make today that lead to long-term changes that can lead to major improvements:
Add barriers to your spending
As they say, make it hard to do the wrong thing and easy to do the right thing. To curb overspending, put up speed bumps, suggests Rick. "When you throw up these speed bumps, it'll make it harder for you to spend," he says. For instance, delete your credit card info from online platforms like Amazon and your favorite online retailers, or unlink your PayPal account.
Train yourself to be financially prudent.
Individuals who are financially prudent have a tough time spending and can actually feel pain when they part with their money. These behaviors can help you slow down your spending, says Rick.
You can also slow down your spending by entering all your physical receipts into a spreadsheet. Sounds burdensome? That's the point. Plus, it'll help you remember what you spent your money on.
Have an accountability buddy
Having someone who can help you keep tabs on your spending can help you stay on track with your goals. For instance, you can touch base about once a week with someone you trust in your tribe — a friend, partner, family member or spouse – on how much you spend on discretionary purchases. Or maybe you can give a weekly update of your savings or debt payoff goals.
These check-ins don't need to be extensive by any means.
Automate your savings
When you're overwhelmed by your money, automating your savings can give you a motivational boost and help you make long-term changes, and it doesn't have to be a significant amount.
Even starting with a few bucks a week can add up over several months. The key is to get the ball rolling and lay the groundwork for your savings goals. That way, when you're feeling more confident and are raking in more income, you'll be able to save more and see that pile of cash grow quickly.
When you have less to spend you may learn to work with what you have. This can also help you save more aggressively.
Do a financial audit
It's also good practice to reassess your budget regularly. This can include:
- Review your budget for needed changes (creating new spending categories, deleting ones that no longer serve you, reallocating your money)
- Review subscriptions to see which ones you may be able to remove
- Check your progress on paying off debt
- Review progress on your emergency fund
- Check your FICO® Score
- Get your free credit report
- Look into new bank accounts that might be a better fit for your needs
- Shop around for better auto and homeowners insurance policies
- Do comparison shopping for larger, recurring bills like home internet and cable to find the best deal
You don't have to do this all at once. Setting aside some time each week, month, or every quarter can lead to a better money management system.
Bottom line
These small changes are good hygiene, says Rick. "It's not going to have immediate transformative effects, but if you can just spend some time adapting your practices, like cleaning up your wallet and online accounts— maybe there are Excel files— or researching online banking sites that work for you, invest in those new practices. Over time, it'll make a difference."
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Jackie Lam is a personal finance writer whose work has appeared in Salon, Business Insider, and GOOD.